Ladies and gentlemen, welcome to the Capgemini 2020 Q1 revenue confirms call. I now hand over to Mr. Paul Hermelin, Chairman and CEO. Sir, please go ahead.
Thank you. Hello everyone, and thank you for attending this call. Given the context, I will start by a focus on COVID-19, then I will give you the highlights of the quarter. Carole Ferrand, our Chief Financial Officer, will then guide you through the details of our results, and my successor, Aiman, will tell you about the perspective. Before I start, let me share with you that these results have a special taste for me. They will be my last one after 103 financial announcements since I first discovered this exercise in 1993, and I must confess, I am not sure I will miss them. Now let's move to COVID—I will miss you, of course, and my relationship with you, but not with this kind of early morning call. Okay, let's move to the COVID-19.
On the COVID-19 pandemic, let me first and foremost thank all of our colleagues for their intense mobilization. What they achieved by maintaining the links with their clients and delivering remotely what they're committed to is outstanding. Our first concern is and remains the protection of our teams. I think we have been the fastest in our industry to take immediate measures, possibly because we were exposed in Italy. As early as February, we issued global guidelines and safety rules. We restricted travels, then forbid them, launched awareness campaigns, and put in place a 24x7 governance. Each of our 43 countries reports daily to this group crisis management, which in return organizes daily conference calls. We monitor closely the situation and keep informed of the health of our sick collaborators. Remote medical assistance has been put in place, as well as psychological support.
We are in the process of extending health coverages to families in India. We will also issue strong guidelines for the resumption of lockdowns. In less than three weeks, which is an achievement, our workforce shifted to work from home at almost 95% all over the world, including India, where we have moved more than 100,000 colleagues. For India, for example, we provided thousands of laptops. We paid particular attention to our IT infrastructure, the quality of our networks, and the VPN, giving also access to 4G dongles when necessary. As a technology leader, we demonstrate our ability to cope with agility and ensure the quality of the delivery. I'm proud of the way we guarantee distributed delivery. We receive every day in Italy, in France, in India, or in the U.S., testimonies of our clients praising our work.
As a global company, we had the experience of what had happened in Asia and were able to prepare for the wave coming. In countries still under lockdowns, we continue to maintain strong relationships with our clients and to proactively approach new ones. In APAC and also in other countries, we see the restart is already coming. Aiman will give you more details on this. Come back on the business side. Q1 was a good quarter, and not only considering the situation. Regarding cash, I am pleased to see that our cash collection is good and slightly ahead of last year at the end of Q1. Another important announcement I want to share with you: considering the COVID-19 crisis and among other measures, the Board of Directors, during its meeting on April 27, suggested to reduce the dividend by 29% to EUR 1.35 per share instead of EUR 1.90 initially announced.
This will be proposed for approval by the next General Assembly, which will take place on May 20. This being said, our results in the quarter are in line with our expectation, which is per se quite remarkable, given the fact that some of our entities were affected by the lockdown before the end of March. For example, Italy started to confine on March 9, Spain on March 15, and France on the 18th. We kept saying the group was resilient. Considering the crisis we face, I would even say the performance is outstanding. We are growing 2.3% in constant currency, supported by digital and cloud growing by 20%, and I want to highlight some successes. APAC is growing by more than 10% and is back on track after severe lockdowns. Our consulting activity knew also how to meet the client needs with almost 10% of the growth.
What about France? Growing by 3.3% despite two weeks of lockdown at the end of March, and Italy reaching almost 10% growth when the country was so terribly hit. I said it before, but I have to praise again the incredible work of our teams. Our bookings grow by 0.8%, which we consider a very decent figure given the impact of COVID-19 at the end of March and the strong base effect of Q1 2019. We are happy that many of our key sales enable our client digital transformation during this period of turmoil. Another positive point: our flow of deals continued right up to the last day of the quarter. Interestingly, we are closing deals with clients in heavily affected industries, for example, Cathay Pacific, or a large restaurant group based in the U.S. Our service meets our client needs, and they will continue for the restart.
The facility the whole group switched to telework in three weeks proves our agility and our client focus, for which we redeployed our portfolio offering. I will give you now some details on the deal we signed. Let me cover a few examples briefly. First, our partnership with Matalan, the U.K. retailing giant, spans for more than 15 years, the longest in Capgemini U.K. retail portfolio. We just signed a new five-year agreement supporting their transformation with the migration of application and service to the Capgemini Cloud Platform. In telecom and media, for Univision, the U.S.'s largest supplier of Spanish language, we have signed a five-year infrastructure managed service deal. While we nested a world leader in renewable fuels, we signed also a five-year renewal to support them on their cloud and digital journey.
Last example, Liberty Seguros, which manages Liberty Mutual Group retail operations in Europe, has selected Capgemini for a five-year strategic partnership deal covering application and infra managed services. We were chosen for the quality of our solution, our flexibility, and our ability to present as one single organization. In addition to this, we are seeing many consolidation opportunities as clients look to reduce their costs. Let's switch now to another key point of our quarter. Q1, as you know, was a major moment in Capgemini's history because we saw the very last steps of our acquisition of Altran. I can only express my satisfaction at the complete success of our offer. I will not come back on the detailed chronology of this acquisition that you have followed in the last few months.
We are now fully in control, 100% of Altran's capital, which will allow us to implement the synergies we had planned and called the intelligent industry. Reach of 270,000 talents we will expand together with an unmatched scale. As we had planned, this powerful combination will be a game changer thanks to our expertise in 5G, IoT, and AI, and our in-depth knowledge of our respective markets. Product as well as operations, support, and services will benefit from our convergence and our exploitation of data. Let me finally have a word for Altran's colleagues and tell them how happy I am to welcome them in the Capgemini family. Thank you very much for your attention, and now I hand over to Carole.
Thank you, Paul, and good morning, everyone. Before I walk you through our financial highlights for Q1, please keep in mind that all our Q1 figures in this presentation are stated before any contribution from Altran, which will be consolidated only from April 1. As Paul mentioned, Q1 revenues came overall in line with our expectations and trends already observed in Q4 last year. With revenues of EUR 3,547 million, our constant currency growth reached 2.3% in Q1. This growth was mainly fueled by a 2% organic growth, with only 30 basis points coming from acquisitions. FX was a tailwind this quarter with 80 basis points of positive impact, which can be attributed to the strengthening of the US dollar against the euro. Let's look now at our constant currency growth by regions.
North America came in the wake of the last quarter of 2019 with a 0.6% decrease in revenues. While the manufacturing and energy and utility sectors underperformed in the past quarter, financial services recorded a slight growth. U.K. and Ireland recorded a slight improvement with an as-expected revenue contraction of -2.6%, a touch better than the -3.1% experienced in Q4 last year. Financial services remained clearly under pressure, but it's worth noting that the manufacturing sector proved quite dynamic. France posted a 3.3% growth, mainly fueled by the public sector and services. The rest of Europe delivered another quarter of robust growth at 5.1%, with notably a solid momentum in manufacturing and consumer goods and retail. Last but not least, Asia-Pacific and Latin America maintained a double-digit growth rate with an 11.2% increase, mainly driven by financial services, consumer goods and retail, and energy and utilities.
Moving on now to our constant currency growth by business lines. Let me remind you that our activity level by business line is measured by constant currency growth of total revenues generated by each business line, so before the elimination of internal billings between business lines. Strategy and transformation, which represents 7% of group revenues, delivered another quarter of strong growth of its total revenues, + 9.6%. This growth was notably fueled by client demand to support their digital transformation, which remained quite strong during the first two months of the year. Application and technology are our main business line, with 71% of group revenues, recorded a decent growth of 2.1%. Finally, operations and engineering, which accounts for 22% of group revenues, posted a 3.5% growth, mainly driven by our infrastructure services. Moving on to our bookings, bookings for the quarter reached EUR 3,403 million, up by 0.8% in constant currencies.
This is again a slight increase after a strong growth that we have experienced in 2019, with a 11% constant currency growth for the full year. Finally, a few words on the headcount evolution. Group headcounts total 219,000 employees. It's up year on year by 6,300 or 2.9%, and slightly down sequentially by 200 from December 31. The offshore growth was 2.4%, so our offshore leverage remained stable at 57%. Lastly, our attrition rate went down by 3% in Q1, a logical move considering the uncertain environment. With this, I now leave the floor to Aiman.
Thank you, Carole. Good morning, everyone. I will focus on the current COVID-19 situation, how we adapted to this new reality, of course, how we see the market, our resilience, how we prepared to take advantage of the rebound before discussing Altran integration and our societal contribution. Let me start with some thoughts. The last week has strengthened my conviction on the group's ability to adapt to a very fast-evolving situation, driven by the level of alignment and strengths of our leadership team, our ability to mobilize our team and execute fast, our client intimacy, our strength and resilience, and the strong values that embody this group since its foundation. We have demonstrated a quick, strong, and efficient reaction to the COVID-19 outbreak.
First and foremost, as Paul mentioned, we have taken the necessary precautionary measures to ensure the safety of our employees, and we have fulfilled our commitments to our people, honoring our planned increments and rewarding them for a solid 2019 performance. We are also using some of the additional capacity currently available to accelerate the reskilling to better position their career development, but also to develop new offers. From a client standpoint, we moved rapidly towards the work-from-home model in agreement and within the constraints set by our clients without disrupting services. We have maintained a strong level of client satisfaction and delivery quality. We have, in this crisis, reinforced our client intimacy, which positions us well for the future.
On the business activity side, sales and offerings, we continue to generate new opportunities, including some driven by the COVID-19 crisis, but also by digital and cloud, and we sign new deals across geographies and industries. We have established task forces to identify and spread best practices across geographies in terms of sales and delivery efficiency in a work-from-home world. Last but not least, our discipline around cost management has been exemplary. From day one, all levers are identified and are being used from recruitment to vacation, subcontracting, and more generally, all external spend, including, of course, travel, but also capital expenditures. All senior management and employees are contributing to the effort, with some teams or individuals proposing sacrifices beyond the call of duty. The speed and reactivity around cost containment is a very important factor to protect our market.
Now, I want to spend a few minutes to share with you some perspectives on the market and what we see. The impact tends to be more sectors and geographies driven, recognizing that the business mix and the level of lockdown in a specific country, of course, cannot be ignored. What I'm sharing with you is our view by sector for the next two or three months. We have scenarios on what happens beyond, but I consider it's too early to comment on them. The most impacted sectors are the ones where activity has significantly come down due to the lockdown, notably travel and transportation, of course, but also aerospace, automotive, or non-food retail. We estimate that at the combined group level, that represents about 25% of our business.
Our exposure in these sectors, including Altran, is primarily to the auto and aerospace, but in the travel and transportation, for example, it is limited to a few client situations with minimal exposures to airlines. On the other end of the spectrum, the broader healthcare sector, the telecom sector, and the public sector are doing well due to the increased level of activity and demand. Here again, we estimate it represents about 25% of our revenues. Let me remind you that notably, the telco and healthcare sector have been reinforced by Altran's position in these sectors, notably in North America through the acquisition of Aries. Now, we see Q2 as the bottom of the crisis, driven by the lockdown. Announced exits from lockdown during May should drive improvement starting end of Q2 into the rest of the year.
The two elements that create really volatility in perspective today are what will be the slope of demand increase coming out of the lockdown, as this will drive the acceleration in Q3 and Q4, and also, not to neglect, a potential reconfinement risk later this year. The volatility of these perspectives remains important and does not provide enough visibility for the group to provide guidance at this stage for 2020. I still have full confidence in the resilience of the group and our ability to sustain the crisis as we have started in Q1. From the scenarios I'm looking at today, we should show, including Altran, a better resilience than in 2009, both on the top line and margin front. Let's talk a bit about the resilience of the group and what has changed. For me, it has significantly increased since the global financial crisis.
This is not linked to just one aspect, but to a combination of a number of levers we have worked on over the last decade. The initial response on the cost side is critical. We today benefit from an increased alignment throughout the organization and from a much stronger discipline around cost and cash management. This is a solid foundation to deliver a resilient performance. We then can extract the incremental value from the agile operating model that we developed over the past decade. Like all European-originated players, we suffered during the global financial crisis from a rigid model, essentially onshore, primarily European, managed at the level of metropolitan areas. Capgemini is now recognized on the market as a global player and for a distributed delivery model leveraging a large industrialized, competitive, and structurally flexible offshore platform.
The agility of this model is well illustrated in this Q1 performance. Our business mix is also more resilient. On the client side, our client base is well diversified, both from a geographic and sector basis, with limited concentration. This base of existing clients will contribute, on average, 95% of the next 12 months' revenues. On the offering portfolio, we now combine both industrialization and innovation with an increased sectorial focus, driving both cost efficiency as well as growth for our clients. Innovation and transformation fueled by digital and cloud remain a priority for our clients as an enabler of flexibility and efficiency. Finally, building on that, we have now become more relevant than ever to our largest clients. Our client-centric organization, bringing the whole value of the group through a single interface, has enabled us to build more strategic and intimate relationships.
With this, our top clients have consistently exceeded the group growth over the past few years. Now, while we continue to focus on improving the work-from-home efficiency in sales and delivery, we are prepared to take advantage of the rebound. With this regard, we are prepared to exit the lockdown period, acknowledging it will be progressive. We are ready for the return of our employees in our offices and client premises. We have finalized our processes and protocols, collected the required certification, and equipped our offices with all safety measures and equipment. We were already proactive for several quarters, as you know, around framing transformational deals with our client. We clearly see the COVID-19 crisis as an accelerator in terms of large deals focused on cost transformation or driven by vendor consolidation.
We are well positioned in many cases based on our ability to successfully achieve cost efficiency while driving transformation, as illustrated last year with the buyer deal. Additionally, we have developed new offerings related to COVID-19 to adapt to the evolution of the situation. This new offering framed around respond, restore, and relaunch aim at helping clients accelerate their restart, support their workforce transformation, and the evolution of their operating model. Beyond the coming months, we also see opportunities coming from the COVID-19 outbreak and its consequences. Indeed, our operating and delivery model will evolve as well as our work environment, becoming even more digital with an evolution of the use of our offices we will lead in workforce transformation.
Progressively, with clients becoming more aware and convinced of the working-from-home model and its performance, we should be able to digitally deploy people from a country to another, including from our onshore operation. We will hence become more agile with less geographical constraint, while at the same time providing, in a more fluid and less costly manner, additional access to our capability to clients all over the world. We already have a task force working on the implication of the remote delivery model, a model that will ensure agility, productivity, security while improving our client satisfaction. Now, moving to Altran, of course, securing 100% of Altran's share capital has moved the integration to full motion. It is articulated around three phases.
The first phase, from April to September, which has already started, the main objective will be to secure the initial onboarding of Altran, which is well in progress, gain common understanding of the existing organizations, capabilities, processes, and, of course, design the integrated organization that we want to put in place. From October to December, in the second phase, we will focus on designing the detailed implementation plans and prepare the budget for 2021 for the integrated organization. We will start rolling that out in phase three across 2021. We already have a program structure set up with a dedicated team of both Capgemini and Altran experts reporting to an executive steering committee that I chair. The work is organized around 10 work streams, which are currently finalizing the detailed work plans.
The integration phase is fast, and there is no slowdown due to the COVID-19 crisis or the work-from-home. Finally, on synergies, we fully confirm the annual cost synergies of EUR 70 million-EUR 100 million and the revenue synergies of EUR 200 million-EUR 350 million run rate after three years. A majority of cost synergies run rate should be achieved by middle of next year. Now, what have you achieved so far? In the last two months, the integration program has paved the way for a smooth onboarding of Altran. First, on the leadership side, in spite of lockdowns, we carried leadership meetings and operational reviews with leaders from Altran and Capgemini in all key countries. We welcomed Dominique Cerutti to the group executive committee, while one of our senior executives, Hubert Giraud, was appointed as Executive Vice President of resources and integration for Altran.
All leadership exchanges have been very productive, and the passion for value creation at clients is the integration driver. A lot of activity on the go-to-market. We proactively reached all top clients. Our sales and account teams have been fully briefed with clear commercial guidelines and rules of engagement. Our account teams have already identified over 70 joint opportunities to pursue, some of them in the tens of millions. On the portfolio front, we had mutual discovery of capabilities and assets to identify potential synergies. We expect to launch at least two convergent offerings around intelligent industry before the end of this quarter. There is, as expected, an excellent cultural fit demonstrated by the ease of working together over the last few weeks, even remotely, which paves for me the way for a very smooth integration.
I want to finish on the contribution of Capgemini and its teams to the fight against the COVID-19 crisis, which, beyond affecting our business and day-to-day lives, is having and will continue to have a significant impact on the world economy and people's lives. Facing a global crisis, it only seemed natural for us to protect our employees, but also to contribute to the fight against the virus. Our employees have launched dozens of initiatives throughout the group, highlighting our solidarity and entrepreneurial spirit. I refer you to our press release on COVID-19 and some of the examples listed on this slide. Overall, 250 ideas and initiatives were generated across the world. Hence, we decided to create a social response unit to steer most of the initiatives already launched and to be stopped in the coming weeks, an effort which will continue beyond the current crisis.
We are now ready for your questions.
Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. The first question comes from Adam Wood from Morgan Stanley. Sir, please go ahead.
Hi. Good morning, Paul, Carole, and Aiman. Thanks so much for taking the question. Paul, congratulations on 103. That's a pretty good innings. I hope you enjoy the early mornings without the calls in future. Maybe two, if I could. First of all, I think we all understand the difficulty about trying to guide on top line through this crisis, but I guess you do have more visibility onto what happens on the cost side. Could you maybe talk us through a little bit more detail, maybe with some actual numbers on what you're doing on costs? Give us a feel between the split on fixed and variable. Most importantly, if we look back to the financial crisis, it looked as if in the worst four quarters, the revenues were down about 7%, maybe about 9% in the worst quarter.
That hit your margins over two years by about 1.7%-1.8%. I think in the past, you've said that you felt you could cut that impact down to 1% or less if we reran the financial crisis. Could you maybe talk about whether you still think that's the case or whether the suddenness of the impact that we've seen here would mean that there are differences and whether also the difficulties around changing delivery so quickly would also have greater impacts? That would be really helpful on the cost side of things. Just secondly, I appreciate you're saying the second quarter is going to be the most impacted.
I wonder if there's anything you could say around what happened in March to the revenues of the business and what you've seen in April that could at least give us a quantum for what we should expect in the second quarter. Are we in the area of - 5, - 10, - 15? Just so at least we can kind of calibrate the models to where that impact has got to, at least on the basis of what you've seen on March and April. Thank you very much.
Okay. These two questions are very long questions, Adam. Okay. Listen, I'm sorry. I will let Carole talk. No, no, that's fine. I'll let Carole talk about the details around the cost. What I said, which is very clear, is today, from what we see and the scenarios we're looking at in terms of the slope of recovery of demand, we expect to be better than in 2009. Okay? The 100 basis point is still what we are targeting, right? I still have that in mind, targeting 100 basis point or less in terms of degradation on the combined group compared to last year. Okay? From what we see today, we consider it as being achievable. As I said, there is volatility around the forecast and the slope of demand. This is something I don't know for the moment today.
The second thing is, on the top line, we also see good resilience. I mean, in March, as we said, Italy overall for the quarter grew by double digits, which was a country that wanted to confirm at the beginning of March. We haven't seen a lot of impact on the activity. The quick move of work from home has allowed us to be able to maintain utilization pretty high in some countries. Of course, coming into this quarter with some factories shutting down, etc., there is definitely impact in some sectors: aerospace, automotive, transportation. I cannot tell you we're not impacted. We are, of course, impacted like everybody else. That's going to impact Q2.
We see Q2 is the bottom yet because a lot of it is coming from the lockdown and the fact that some of our clients have very limited revenue coming in and had to take cost measures. We had to help them coming out of that. I can promise you, when I look at some of the discussion we had with some of our clients, the level of intimacy has in some cases allowed us to maintain above potentially some of our competitors' position at some of these clients because they value the speed at which we have reacted. They value what we are bringing them and all the solutions we are trying to propose, basically to support them in this crisis. Carole, on some of the costs, sir?
On the cost side, as you know, Adam, we have a very flexible and agile model with an offshore delivery center primarily in India. If we look at our cost base, of course, we have worked on all the levers we've got at hand to reduce our costs. As you know, the levers are numerous. If we start with the staff costs, you know that two-thirds of our people are located in countries with high flexibility, socially speaking. We have also implemented a strict control of all hiring with a structural attrition that is reduced, for sure. We've got also a large base of variable compensation for all our staff. We are speaking of several hundreds of millions there. We have, of course, worked on flexing all our subcontractors, not only on direct expenses, but all discretionary expenses.
I remind you there that the subcontracted costs, if we look back at Capgemini for the entire 2019 year, is about EUR 1 billion. We have revisited all purchasing. The total purchasing for Capgemini in 2019 was around EUR 1.3 billion. Of course, needless to say that travel expenses are scrutinized. It represents EUR 0.5 billion last year. We have also a flexibility model where I remind you that since two years and a half now, we have a centralized model where all our innovative portfolio offerings are orchestrated centrally. Our investment in innovation and high-growth markets is also flexible.
Next question. Now, there was a second question from Adam.
Yes. Again, listen, I do not want to guide for the second quarter because there will still be some volatility. I do believe overall, on H1, we will prove that we have good resilience. Okay? I do not want to guide on a specific number at this stage, Adam, because I still consider there is still some volatility around the months of June. If I tell you, you can look at the overall year. If I tell you that we are going to be better overall on the top line and more resilient in 2009, it will give you an idea about what we will show in Q2.
Thank you very much.
The next question comes from Mohammed Moawalla from Goldman Sachs. Sir, please go ahead.
Thank you. I had a couple as well. First, just on the digital business, can you talk about the relative resiliency of this business, both in the shorter term, but as we kind of come out of the crisis, how you expect that business to kind of fare in terms of, as we see structural shifts in terms of shifting to the cloud, how you expect to potentially benefit? Secondly, on Altran, again, as sort of we think of the kind of new world, how do you think the structural case for kind of Altran changes and what are your kind of conversations with customers yielding around the whole digital manufacturing space? Thank you.
Yeah. Digital. On digital and cloud, first, actually, we see an acceleration, notably on the cloud side because cloud provides quite a few cost savings. We actually see clients increasing the cloud. If I look at our growth with some of the cloud providers in terms of bookings in Q1, we are around 25%. It is still pretty good rhythm there. I see the demand will remain sustained even during the coming months. On the digital side, I see it as a prerequisite to the evolution that the clients are looking for. If you look at the evolution of the delivery model and the supply chains, I do not see how we are going to see any slowdown in digital. In the short term, some clients, because of the cost-cutting measures, will put a few things on hold.
Wherever it is possible in some industries that we see, like in healthcare or in telco, the digital pace is still pretty high. I am still quite confident on the fact that digital and cloud will remain a pretty strong growth driver as demand starts to recover. Even today, as I said, the cloud part remains paramount, especially when you look at some of the cost transformation programs we are discussing with clients, basically as they look at how to become more efficient coming out of the crisis. Yeah. On Altran, in terms of when you talk about the structural changes, again, I mean, remember what the model we have created is really to be able to create a single interface to the customer with what we implemented about two years ago. Altran will come into that model.
What we look forward to is basically to see how we're able to bring the whole value of the group, including with Altran now, with the convergent offering around intelligent industry, to create a single interface to our client. That will enable us to basically see that growth acceleration that we expect. I mean, having generated only in a few weeks already over 70 joint opportunities, with some of them in tens of millions, shows the potential that we see in terms of the integration of Altran. One point to mention as we talk about Altran and basically related to the question of Adam just before is the resilience of Altran compared as well to the last crisis has increased significantly. Why? Because the mix has changed as well.
When we see the sectors of Altran, there are definitely sectors like aerospace and automotive, which are going to be more volatile. On the other side, we also have all the growth generated by sectors in the healthcare and life sciences and in the telco segment. It has provided a much more equilibrated picture that also has increased significantly the resilience. I do believe overall, the combination will provide even something more resilient, having basically a more balanced exposure in terms of sectors, including sectors that we see growing very fast coming out of the crisis.
You think that Altran, the 8% growth rate they kind of delivered, is still very feasible over the medium term?
I'm not looking at Altran growth rate and separate spend, as you know. Our focus is really around the intelligent industry and the convergent offering. I do believe that with Altran, the overall group will have a strengthened growth profile. We're not looking to deliver on an Altran plan because we haven't done any acquisition just to increase our business and create a new business line in engineering and R&D. We have done this acquisition to focus on the convergent offering that we expect coming from the convergence of IT and operation, which will strengthen the group growth profile.
Okay. Thank you.
The next question comes from Michael Briest from UBS. Sir, please go ahead.
Thank you. Good morning. Paul, I'll add my congratulations to your long tenure and for putting up with us as analysts on these calls. I'm sure it can be quite wearing. Just a couple from me as well. On the dividend, I'm curious as to why the 29% cut, why not halving or a quarter? What's got you to that point? Should we assume that you're not using any of the sort of government furlough arrangements? I think a lot of companies have found it difficult to pay dividends if they've been using those resources. Can you talk about the thinking on the dividend? In terms of clients, as you mentioned, there are some sectors which are very challenged. We're expecting, and other companies have said that those clients in those sectors are asking for extended payment terms, reductions in pricing.
Can you talk about what you're doing to protect that long-term relationship while also making sure that you don't surrender something on price or margin, which is very hard to recover in, say, auto or aerospace? Thank you.
Okay. Paul, on the dividend. As you may know, I am a member of the board of AFEP, AFEP being the association of the key public and private companies in France. As AFEP, we have determined that if we use furlough subsidies, the members of AFEP should first cut their dividend by 20% compared to 2019. Second, the CEO should volunteer to give 25% of his compensation during the furlough usage to social activities. We strictly complied with that, with the unanimous support of the board of directors that was convened yesterday. In the case of pay cut, I mean, and myself, we decided to go further since we have applied the 25% cut throughout the full year 2020. I just want to say that for the board, it is important that we show to our shareholders that we have absolutely no cash concerns.
That is not a reason. The dividend is the remuneration of 2019. As we have paid bonuses to our managers and implemented the pay raises when they were relevant in January, we thought we were owing our shareholders this dividend. We strictly complied to the AFEP orientation and decided not to add any additional cuts.
I mean, on clients.
Yes. On clients, yes. Of course, as you imagine, you always get in this period, like every company in this sector, as clients are trying to cut costs, the same way we put pressure on some of our suppliers and partners, the same thing is happening with us. It is always part of discussion and negotiation. It is a give-and-take kind of environment that you have to deal with.
Yes, we do resist things which would be structurally very negative for the company over the long term because the short-term gains are basically we will pay them later. You know very well our discipline around that and how we basically ensure that we protect always our future in some of these. There are situations, of course, where we'll consider basically what is in the best interest of our mutual partnership with our clients and see where we need to make efforts, even if it's for a period of time. Sometimes we come up with creative ideas about how we can deal with the situation and how we can embark the client into a bigger transformation versus just looking at very short-term costs. Payment terms, the same thing. We're resisting all delays in terms of payment terms.
Paul did mention the fact that our Q1 cash collection was ahead of last year. So far, we are performing well and we are able to maintain. Yes, we have some clients coming up with delayed payment requests, etc., and so on. You have to manage the balance between maintaining good client relations and resisting potentially some of the short-term demands.
Just to follow up on the dividend and the furlough, I mean, you say 95% of your workers are working at home. Should we conclude that 5% are on furlough, or there's some people who haven't got computers or access to broadband, perhaps, that means they're not working, so there's a utilization impact? What is that 5%?
First, you have some countries which are not in lockdown or in partial lockdown, like Sweden. We still have some people who are on site for critical activities, for some activities that some clients cannot be performed from home. You also have, in the case of India, for example, typically our pressure would not consider them in our percentage because they're not doing productive work. We basically don't feel that we need to enable them in the short term with laptops, etc., because they are not currently very productive. This is what gives this 95%, Michael.
Okay. All right.
In China, people are back on site. They're not working from home.
Okay. Thank you very much.
The next question comes from Charlie Brenna n from Credit Suisse . Sir, please go ahead.
Great. Thanks so much for taking my question. I was wondering if you can give us a sense of what's going on with your customer conversations at the moment. My recollection from 2009 is that we went through a phase of vendor consolidation. Are you starting to see those conversations now? Clients have already been through a number of iterations of vendor consolidation. I guess doing it from here feels potentially quite painful. Are you expecting a phase of pricing pressure as we come out of this crisis, as the bigger suppliers are jostling for position? Thank you.
Yes, there are some discussions about vendor consolidation. I cannot say there are many, but there are some. It depends on the client situation. I see some clients who are much more fragmented than others. Some are already very concentrated. We really do not see much more vendor consolidation there, but there are opportunities. Frankly, we are proactive. We are not waiting for clients to come up with that. On the other question, it is very important to really understand what is going on. If you stay still and you do not do anything, you come under price pressure, okay? Which means if you are not providing any solution to your clients on what they can do in terms of evolution, they have to find a way to cut costs.
What we are doing is exactly the opposite. We are extremely proactive, going to a lot of our clients, coming up with solutions and proposals around how we can help them drive significant cost transformation. You think about the buyer deal. There is potentially coming out of this plenty of buyer deals. I'm not going to say we're not saying we're going to sign five buyers this year, but there are definitely opportunities to provide cost transformation. We have proven our ability to be able to do it. In that, things like digital and cloud are very important because they are part of the levers that provide the flexibility and agility and provide new opportunities in terms of cost transformation.
I do believe, actually, this crisis in a number of cases is going to accelerate some of these deals as the pressure on clients to find ways coming out of there to be able to create some space for investment for the recovery is going to become more important.
Great. Thank you.
The next question comes from Alex Tout from Deutsche Bank . Sir, please go ahead.
Hi.
Yeah.
Yeah. Hi. Morning, everyone. Firstly, Paul, congratulations and all the best for the future. Questions from me. Firstly, could you give us an idea between your time and materials-based engagements and fixed price? I appreciate your comments that you're trying to be disciplined around pricing concessions, but what are you seeing from your competitors, particularly the offshore competitors? Are they also being disciplined or aggressive in this environment? Finally, on the industrial automation and IoT-type activities, the motivation behind the Altran deal, a lot of manufacturing is suffering currently. How do you see those industrial automation and IoT initiatives playing out over the next six months or so? Do they get very badly hit just because of the position of the sectors that they're in, or do they behave more like the digital engagements and stay resilient per your previous comments? Thank you.
Listen, on the first one, beyond TNM, because a lot of models around projects which are TNM, it does not change. This is quite resilient. What I call the pure staffing model, where you just give budgets to a client and he is going to decide what he does with them, which for me is really the one that is there, is less than 20%. Now, we have activity which is higher than that done in time and material, but it is managed time and material, like delivering a project, but it is done in TNM. For me, it is not of the same nature. The purely staffing model is a much lower percentage of our business today, including for Altran, by the way. I am talking here, the number is a combined group one.
Now, going to your question regarding pricing and pressure and pricing from I think, at least what I see for the moment, people tend to be quite disciplined because a lot of the offshore vendors, as you know, came up and said they will protect their margin and they will show resilience. I think we have discipline for the moment. I think the proactiveness is like what we are doing is more around the transformational deal and the cost transformation deal versus pure price reduction for volumes, right? I'm not saying there will be no cases where this will happen, but I don't see desperation for the moment in terms of this happening in the short term. On the last point on the intelligent industry for any industrial players, I don't see that slowdown. There's not going to be a slowdown about moving to electrical car and autonomous systems.
There'll not be a slowdown around the industrial automation. Remember that this is what's going to provide the agility, flexibility, and overall drive the speed of innovation, but also the cost models. On the contrary, this investment is what's going to provide potentially some light at the end of the tunnel for a lot of companies, and it actually might drive an acceleration. I don't see them as being investment for growth only. I think a lot of this investment, especially on the industrial side for the technology company and industrial companies, is to provide the agility and the cost flexibility they need to be able to react better to crisis and to evolutions in demand and environments.
Thank you. Very helpful. Thanks.
The next question comes from Neil Steer from Redburn. Sir, please go ahead.
Hi. Thank you very much. Firstly, huge congratulations, Paul. I have two questions. Firstly, when you make your forward-looking commentary about the turnover and the margin trajectory of the business today compared to 2009 and so forth, what are you assuming in terms of the economic aftermath of a sort of a COVID-19 marketplace? Are you assuming that the economic impact is less than the financial crisis, in line with the financial crisis, or a lot worse than the financial crisis? I have a follow-up. Thank you.
Okay. On the first question, I do believe it's more brutal initially on the front end. That means when you look at it, it happened suddenly. It happened across industries. It happened everywhere. That's quite different from the financial crisis where things were much more gradual. I believe that based on that, the rebound is going to have a different picture, but we see it as gradual. I don't expect to see demand having recovered completely. There could be a cycle. I mean, the thing we are, as I say, a bit concerned about, which creates some volatility, is the potential reconfinement, which is a scenario that's difficult to be able to predict at this stage.
Overall, from my perspective, from an economic perspective, it is more sudden initially, but then the cycle should also, to a certain extent, be shorter in terms of. It is by sector. It is not overall. Sectors are different. As you know, I do not see a slowdown in telecom for the coming years. With an evolution of the overall how people work, the digital work environment, and the work from home, there will be investment in telcos that will continue. Same thing on the healthcare sector or the public sector to be able to sustain demand. It might be slower in terms of recovery, as we expect in things like aerospace. What we look at is realistic overall, I think, from an economic perspective in terms of what we see as evolution, because we look at clients and clients within sectors.
We have done a heat map around that by sector and by geography, and it is quite consistent across sectors, what we see. That is what we base basically our scenarios on, is the speed of recovery in some sectors and within that at some of our clients.
Okay. Thanks for that clarity. The follow-up question was just, I think, Carole, you mentioned a figure for the subcontractor costs that you have. I think you mentioned a billion. The question is, to what extent can that change? I mean, that cost alone, could that come down from a billion to EUR 500 million if indeed a billion was the figure that you mentioned? What flex do you have specifically on that cost? Thank you.
I won't provide you a figure, but of course, it's a case-by-case study. We study all discretionary expenses. When it comes to subcontracting and direct costs, if we can, we can move to own staff if we can. There are several cases and several ways to handle that. What is true is that we scrutinize all captions of subcontracting, and the basis of that is very significant.
That base figure was EUR 1 billion for Capgemini standalone in 2019, but presumably greater than that.
Exactly. Yes. One billion. Yeah. One billion indeed. Yeah.
Okay. Thank you very much indeed. Thank you.
The next question comes from Nicolas David from ODDO BHF. Sir, please go ahead.
Yes. Hi. Good morning, everybody. I have two questions, actually. The first one is regarding COVID-19. Could you please try to quantify the impact you've seen in Q1 at group level first? Maybe more interestingly, if we take the case of France, what has been the deviation of growth, of the trend of growth we've seen during the last two weeks of March compared with the trend you were seeing initially? Secondly, regarding the free cash flow, I understand that you are disciplined in terms of the payment terms you expect from the client, but should we model a negative development of working cap at the end of H1 and also at the end of the year on top of any impact or should we model on the operating profit? Thank you. You can fly it.
Yeah. Your question regarding the last two weeks, etc., I think is a bit detailed. Definitely, we saw in some cases a bit of evolution of activity, but I would not be able to size it and give you a number because it is a bit different across the different countries. Yes, in some cases, we already saw impacts, of course, in the last couple of weeks of March where we were in purely staffing model and things like that, and my client had to react because of lockdowns. It had some impacts, yes. I will not be able to provide you a number.
On the cash flow side, of course, we are keeping our cash discipline. As mentioned, so far, we have experienced a good cash collection, but we are scrutinizing all sectors. Of course, some sectors are under pressure. We do not compromise between short-term and long-term partnerships. We will see case by case how the situation will evolve, and we need to be very cautious on that. What needs to be noticed there is that in most countries, all the budgetary and monetary measures taken by governments and central banks are facilitating the liquidity of our clients when they need it. That should be seen as a facilitator in the context. Again, we will see how it evolves in the coming weeks and months. Of course, it is something that we will look at in depth.
Just to build on what Carole said, we are very comfortable from a cash perspective. I mean, we have stress-tested very, very, very hard scenarios. From that perspective, our cash standing is absolutely not a concern. There are, of course, scenarios we look at where there could be some impact in terms of DSOs by the end of the year. Again, it is all hypothetical at this stage, but it is things we look at,
of course.
If any, that will be a shift, which is a temporary one.
Exactly. From one year to another. It is not a degradation. We do not see it as a degradation of our cash profile. We see potential shift from 2020 to 2021. So far, we know it is not showing up in our numbers, but it is something we consider, of course.
Okay. Maybe another way to put my first question, I understand that it's difficult for you to give more details, but it seems that you had a lower impact than what we have seen for other peers, either Indian peers or French peers, which has something like one point of impact from COVID-19 in Q1 or even more. Is it true that you explained a lower impact? If so, why so? Could you explain why you show such a resilience?
I think I spent quite a few minutes talking about why we are more resilient. Maybe we should—I'm not going to go back and tell you all what I said there. I do believe the client intimacy, the resilience of our model, the speed at which we shifted work from home, everybody said it shifted immediately. I can promise you not everybody shifted immediately, contrary to what I heard. All of this is what helped basically protect. There is one thing that plays in this group that you have to remember. The group is very entrepreneurial. The speed at which our managers on the ground react to situations is extremely high.
When I started by saying the strength of the leadership team, the confidence and the value that carries this group, this foundation, is definitely some of these elements that come very strongly when you move to a crisis model. Our managers on the ground in any city around the world did not wait for instructions from the top to start reacting, okay? They have all proactively reacted. The resilience is coming from the fact of basically the entrepreneurship in this group is so high that people react immediately to what they see. They do not wait for instructions from the centers to start basically behaving.
Okay. That's helpful.
To mention, in India, we had ordered the last laptops in the country very early to help our people to work from home. I think we were really the first one to react, and we bought any kind of laptop we could to equip our work from home. I really think we were the first one.
Thank you.
The next question comes from Ross Jobber from Citi. Sir, please go ahead.
Great. Thank you very much. I just want to ask a question if I may. I'm interested to know a bit more about your thoughts around vendor consolidation. The question really is this: do you see more of an opportunity for you to gain similar contracts for existing operations? For example, to gain a global contract where you may have historically had a regional contract on the same activity. Or do you think there's a greater opportunity to actually move into related disciplines with customers where you have different operations at the moment?
Listen, both are possible. Again, the vendor consolidation, sometimes the primary driver on that is not there could be three big players and maybe four or five small ones. In fact, the vendor consolidation is not necessarily to kick out one of the big players, that we could be one, but basically more to consolidate some of the smaller ones. It tends to be an accelerator for some of these things that people are looking for, basically potentially quick wins. That is where we see the activity. On the geographic side, yes, of course. I mean, I think when I talk about some of the joint opportunities with Altran, definitely our position or our combined position at some clients provides for a different discussion than what we could have had three or four months ago.
The value perceived by the client about the importance of keeping the Capgemini group as one of its key suppliers and potentially expanding our scope is also reinforced by the combined position that we have at some clients.
Thank you. Do you think the concerns your customers may have around smaller vendors is related to the financial health and stability of those vendors or the fact that you might have a pricing advantage?
It can be a pricing advantage. It can be basically the ability to really drive cost transformation because some clients which were considered for some activities moving offshore are now moving offshore. I can have discussions with senior executives with some clients who basically say the remote work from home has opened our eyes about how much can be achieved in terms of remote work. Things where we saw resistance before where people said it cannot be done because it's impossible. With everybody working remotely, we really see that it can happen, and this can actually accelerate in some cases the move to offshore. If you are working with some small vendors that cannot provide that, it becomes a big challenge to basically work with these vendors to drive this kind of evolution and this kind of cost transformation.
Thank you. Thank you for taking the question.
The last question comes from James Goodman from Barclays. Sir, please go ahead.
Yes. Thank you. Good morning. Paul, yeah, good luck for the next chapter. It is impressive to note the performance having held up in places like Italy and Asia through the quarter. Specifically on Asia, I just wondered if you could build on some comments I think you made that you've seen a strong early recovery in the region. Maybe therefore just put in context to what extent you think actually the sort of magnitude of impact is behind you in Asia. I know it's a small part of the business, but it's interesting for the way the rest of the business will go from here. Specifically, if we drill secondly into financial services, up until this quarter, it's been probably the most talked about aspect of the backdrop.
If we're comparing to 2009, it was the behavior of that sector that was very significant. I was wondering if you could give us some commentary there around what you're seeing, if the nature of projects is changing, or maybe contrast the sort of demand across the different subparts of financial services. Thanks.
On Asia, I mean, to Frank, the evolution is good on Asia, but remember that Australia came late in terms of lockdown and impact. There are some impacts in Australia now that were not showing up in Q1. The rest of Asia, Frank, the demand tends to be good. We see a good flow of deals. China is actually in the growth mode now. That is our perspective. Of course, we are in some countries in Asia. We are not everywhere, but based on the countries where we are positioned, overall, we consider the level of demand being normal, except in Australia. On financial services, it is a contrasted picture from what we see. To be frank, insurance is still doing well and is holding up pretty well.
The banking sector is more mixed, probably more impacting continental Europe than we see for the moment in North America looking at the crisis. There are some impacts there in continental Europe, but North America is showing more resilience so far. Thank you. I just want to close by saying I'm not going to challenge Paul on his duration and relationship with the analyst. I'll leave that one for him.
I will support him as the chairman of the board. I have absolute full confidence in what he will deliver to this wonderful group. Thank you, everybody.
Thank you.
Thank you. Bye-bye.
Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.